An emergency fund is a shock absorber for life bumps. It keeps you from adding to the debt you most likely already carry. The Covid-19 outbreak has shown the difference having an emergency fund makes when a crisis hits. An emergency fund can help cover unexpected expenses that you can’t pay out of your regular budgets, such as medical expenses or home repairs. It can also help you avoid borrowing money or relying on credit cards to cover the costs, which can add to your existing debt and increase the interest you have to pay.
What is an Emergency Fund?
An emergency fund is a pool of money you set aside for unexpected expenses. Having an emergency fund helps ensure you don’t have to rely on borrowing money or increasing your debt to cover the costs of an unexpected expense. An emergency fund not only protects you from accumulating more debt. It also gives you peace of mind knowing you are prepared for the unexpected.
Steps To Create an Emergency fund
1. Create a budget
Creating a budget is essential for saving up for an emergency fund because it helps to identify areas where money can be saved and allows for the tracking of expenses to ensure that the desired amount is being set aside each month. Additionally, creating a budget makes it easier to adjust spending habits to ensure that the emergency fund is growing.
2. Calculate your emergency fund goals
Estimating how much you need to put aside for a financial emergency should be based on your current income and expenses. Consider your income, debt payments, essential living costs, and other fees and subtract them from your income. This will give you an idea of how much you can save for an emergency fund. Aside from this, the number of months the emergency fund caters for is also important (for example, 5 months). This is calculated by multiplying the monthly expenses with the number of months required to decide on the amount to be saved.
3. Have an automatic deposit plan
An automatic deposit plan is an excellent way to stay on track with your emergency fund goals. It ensures you save the money you need for your emergency fund without stress. By setting up an automatic deposit plan, you can set aside a certain amount of money each month for your emergency fund. This is deducted automatically. This way, you can easily reach your goal without manually setting aside money each month.
4. Regularly monitor your progress
Find a way to regularly check your savings, it may be an automatic notification of your account balance. Tracking your progress allows you to correct your track if you’re not on track to meet your goals. It also keeps you motivated to continue saving and provides a visual representation of how much progress you’ve made.
5. Save all unexpected money
Saving all unexpected money is a great way to increase your savings and reach your goals faster. Money that comes unexpectedly can be a bonus, cash gift, tax refund, inheritance, or winning a bet. This way, you’ll have a cushion if you experience a financial setback and have more money to reach your goals faster. Plus, seeing your progress in tangible terms will keep you motivated to stay on track and save.
6. Continue saving after reaching your goal
Some unexpected situations may require more than the emergency fund you planned for can take care of, so it is necessary to continue saving after your emergency fund goal has been achieved.
Keeping emergency funds is essential. However, it is not easy to keep. As a result, certain steps have to be followed to make creating emergency funds easy and convenient.
